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1/15
While Adam Posen correctly recognizes the problems the Chinese economy currently faces, his explanation of what has gone wrong, and what Beijing must do to revive the economy is, in my opinion, completely off the mark.
via @ForeignAffairsforeignaffairs.com/china/end-chin…
While Adam Posen correctly recognizes the problems the Chinese economy currently faces, his explanation of what has gone wrong, and what Beijing must do to revive the economy is, in my opinion, completely off the mark.
via @ForeignAffairsforeignaffairs.com/china/end-chin…
2/15
He argues that China's economic troubles are the result of Xi Jinping's turning against the private sector, especially in response to COVID. This is simply not true. The problems facing the Chinese economy were obvious to some of us over a decade ago.
He argues that China's economic troubles are the result of Xi Jinping's turning against the private sector, especially in response to COVID. This is simply not true. The problems facing the Chinese economy were obvious to some of us over a decade ago.
3/15
They are the same problems that every country that has followed a similar growth model has faced. China implemented a high savings, high-investment model that was extremely successful when the economy was severely underinvested for its level of institutional development.
They are the same problems that every country that has followed a similar growth model has faced. China implemented a high savings, high-investment model that was extremely successful when the economy was severely underinvested for its level of institutional development.
4/15
But once China closed the gap between the investment it had and the investment it could productively absorb, given its particular set of business, legal, financial and political institutions, like every historical precedent, instead of switching to a different...
But once China closed the gap between the investment it had and the investment it could productively absorb, given its particular set of business, legal, financial and political institutions, like every historical precedent, instead of switching to a different...
5/15
model, it continued with the same model of high savings and now-excessive investment, which led – as in every one of the precedents cases – to asset bubbles, especially in real estate, and an ultimately unsustainable rise in debt.
model, it continued with the same model of high savings and now-excessive investment, which led – as in every one of the precedents cases – to asset bubbles, especially in real estate, and an ultimately unsustainable rise in debt.
6/15
As this happened, the locus of economic activity automatically shifted from hard budget-constrained sectors to soft budget-constrained sectors. The turn against the private sector, in other words, was a consequence of China's rising imbalances, and not the cause.
As this happened, the locus of economic activity automatically shifted from hard budget-constrained sectors to soft budget-constrained sectors. The turn against the private sector, in other words, was a consequence of China's rising imbalances, and not the cause.
7/15
For certain economists, any rapid growth is by definition a consequence of private sector initiative, while any slowdown, also by definition, is a consequence of government intervention. But this is not at all what happened in China.
For certain economists, any rapid growth is by definition a consequence of private sector initiative, while any slowdown, also by definition, is a consequence of government intervention. But this is not at all what happened in China.
8/15
China's ferocious growth in the first three decades of reform was the result of heavy government intervention. This included policies that forced up the savings rate and corralled the resulting savings into a highly controlled banking system that was designed...
China's ferocious growth in the first three decades of reform was the result of heavy government intervention. This included policies that forced up the savings rate and corralled the resulting savings into a highly controlled banking system that was designed...
9/15
to flood the investment and manufacturing sectors of economy with cheap financing. It also included heavy currency intervention, tough labor restrictions, and a whole series of direct and indirect subsidies to the manufacturing sector that led to explosive growth in ...
to flood the investment and manufacturing sectors of economy with cheap financing. It also included heavy currency intervention, tough labor restrictions, and a whole series of direct and indirect subsidies to the manufacturing sector that led to explosive growth in ...
10/15
infrastructure and made Chinese manufacturers the most competitive in the world, albeit at the expense of Chinese households. To say that three decades of some of the most spectacular growth in history came simply from "unshackling" the private sector makes no sense at all.
infrastructure and made Chinese manufacturers the most competitive in the world, albeit at the expense of Chinese households. To say that three decades of some of the most spectacular growth in history came simply from "unshackling" the private sector makes no sense at all.
11/15
When Posen says "The condition is systemic, and the only reliable cure—credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life – cannot be delivered," this makes little sense.
When Posen says "The condition is systemic, and the only reliable cure—credibly assuring ordinary Chinese people and companies that there are limits on the government’s intrusion into economic life – cannot be delivered," this makes little sense.
12/15
What perhaps should've been obvious a decade ago has now become obvious to most economists in China: China's biggest problem isn't "government intrusion" (although that certainly doesn't help). It is the distortion in the distribution of income that keeps domestic demand...
What perhaps should've been obvious a decade ago has now become obvious to most economists in China: China's biggest problem isn't "government intrusion" (although that certainly doesn't help). It is the distortion in the distribution of income that keeps domestic demand...
13/15
too weak to support domestic business investment. Without resolving weak domestic demand, it is all but impossible for China to maintain high levels of economic activity except by maintaining the high levels of non-productive investment that have caused the very malaise...
too weak to support domestic business investment. Without resolving weak domestic demand, it is all but impossible for China to maintain high levels of economic activity except by maintaining the high levels of non-productive investment that have caused the very malaise...
14/15
it is supposed to cure. Business investment is weak, in other words, not because of government intrusion but because of weak demand. Government intrusion is the consequence of weak business investment. The way to fix the economy is to fix the demand side of the economy.
it is supposed to cure. Business investment is weak, in other words, not because of government intrusion but because of weak demand. Government intrusion is the consequence of weak business investment. The way to fix the economy is to fix the demand side of the economy.
15/15
I wrote an essay in 2012 which explains why the problems now facing the Chinese economy were inevitable, long before, the COVID-related "intrusions" happened. It was published by Carnegie two years later.
carnegieendowment.org/chinafinancial…
I wrote an essay in 2012 which explains why the problems now facing the Chinese economy were inevitable, long before, the COVID-related "intrusions" happened. It was published by Carnegie two years later.
carnegieendowment.org/chinafinancial…
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